Editorial Board

A Refereed Monthly International Journal of Management

A Measure for Perceived Quality in Indian Banking Industry: Scale Development and Validation

Author

Abstract

Quality signifies performance excellence and superiority of a product or service. The customer's perception of quality has a substantial impact on customer satisfaction and loyalty in any business and banking industry is no exception. The banking industry is transforming into a more service oriented and customer centric system. The competitive landscape and rising awareness and expectations of the customers have brought the concept of quality to the centre stage. Hence, it is essential to understand the important components that constitute quality in banking services. Even though multiple scales are already established for perceived quality, there are only few scales which have been indigenously built based on Indian conditions for the banking industry. The objectives of this study are to identify the various dimensions of perceived quality and to develop a comprehensive scale in the context of the Indian banking industry. The data was collected using questionnaire method from 150 respondents in Chennai who were bank customers. The results indicated an acceptable fit between the sample data and the hypothesized eight dimensional scale for perceived quality. For future research, this scale can be extended and validated using a larger sample covering different geographies across India.

Keywords: Perceived quality, banking, customer care, efficiency, staff, security, tangibles, e-banking, ATM

Introduction

The banking industry is one of the most dominant services in the Indian economy contributing to approximately 7 percent of the Indian Gross Domestic Product (IBEF: Banking Sector in India, 2016). The Indian banking industry has undergone a major transformation post liberalization in the 1990s which led to the rise in the number of commercial banks and a highly competitive landscape (Dwivedi and Charyulu, 2012). This has transformed the banking sector with its focus gradually shifting to more service oriented and customer centric attitude (Mukerjee, 2013). In this industry characterized by minimal product differentiation, the rising competition coupled with the growing customer awareness and expectations have necessitated the banks to improve their product and service quality, which is the key differentiating factor (Jun & Cai, 2001; Mangnale & Chavan, 2012; Rahmani-Nejad et al., 2014). It has been substantiated that perceived quality is a significant driver of customer satisfaction and loyalty (Fornell et al., 1996; Cronin et al., 2000; Johnson et al., 2001; Eklof and Westlund, 2002) which implies that customers who perceive the quality of bank's products and services as superior are highly satisfied and more likely to become a loyal patron. In addition, it also improves the word-of-mouth, market share, profitability and financial performance (Kandampully and Suhartanto, 2000; Gounaris et al. 2003).

Quality is defined as 'fitness for use' (Juran, 1974) in a consumer based approach. Zeithaml (1988) broadly described quality as superiority or excellence. It is consumer's judgment about an entity's overall excellence or superiority which is different from objective quality. Perceived quality of an entity can be referred to as its performance (Johnson et al., 1995). It can be of two types; viz. perceived product quality and perceived service quality. The quality of products which are nearly pure tangible is perceived product quality while quality of pure intangible service is perceived service quality, but most companies fall between these two extremes (Bei et al., 2001). Similarly, banks, inspite of providing major services, they do include products. Thus, perceived quality is the customer’s evaluation of a product or service post purchase and experiences.

The banking industry is facing a rapidly changing market, fierce competition, new technologies and rising consumer demands. Hence, the measurement of quality also needs to be augmented over time with these changing conditions. There are multiple established scales for quality in literature, but they are not entirely compatible to Indian conditions and hence cannot be used in the Indian banking context. This gap has provided an impetus to the current study which aims to develop a comprehensive scale and identify the important dimensions of perceived quality in banking industry.

Review of Literature

The research on perceived quality can be traced back to earlier work on services marketing which was led by researchers like Gronroos (1984), Parasuraman et al. (1985, 1988, 1994a and 1994b), Cronin and Taylor (1992 and 1994), Dabholkar et al. (2000) and Cronin et al. (2000). Gronroos (1984) conceptualized service quality using two dimensions; namely technical quality and functional quality. Parasuraman et al. (1988) introduced the SERVQUAL scale with five dimensions; reliability, assurance, tangibility, empathy and responsiveness which provided the basis for measurement of service quality using the gap model. This is probably the well-known, universal scale designed for service quality. It is measured in terms of the gap between the performance expected by the customers and the performance they perceived they are receiving. This concept was criticized by Cronin and Taylor (1992, 1994) who introduced the SERVPERF scale employing a single measurement of performance relative to expectations rather than two different measures (expected and perceived performance) as adopted by Parasuraman et al. (1988). Other prominent researchers continued the work on quality and added new dimensions over the years. In the context of this paper, we are concerned with the work related to perceived quality measurement in banking industry.

In a banking service quality study, Johnston (1995) identified attentiveness, responsiveness, care, friendliness, integrity, reliability, responsiveness, availability and functionality as the main determinants of service quality. Holmlund and Kock (1996) conceptualized perceived service quality using two dimensions i.e. functional quality and economic quality. The functional dimension involved problems in accessing bank services such as ATM, working hours, information availability, etc. while the economic dimension dealt with bank charges for different services. Bahia and Nantel (2000) proposed six dimensions to measure perceived service quality of banks covering a broader range of marketing variables than SERVQUAL namely, effectiveness and assurance, access, price, tangibles, service portfolio and reliability. Till late 1990s, the studies primarily focused on retail banking with traditional dimensions mainly derived from SERVQUAL.

Later with the advent of the internet banking, many studies focused on electronic banking service quality along with retail banking. Joseph et al. (1999) studied the attributes of service quality in electronic banking and identified them as convenience, feedback/complaint management, efficiency, queue management, accessibility and customisation. In a qualitative study by Jun and Cai (2001) to find the key determinants of internet banking service quality, they proposed a comprehensive 17 dimensional scale classified into three broad categories, i.e. customer service quality, online systems quality and banking service product quality. However, the scale consisted of non-mutually exclusive and overlapping dimensions that required validation and purification. Sureshchandar et al. (2002) set up an instrument to measure customer perceptions of service quality in the context of banking which consisted of five dimensions; namely, core service or service product, human element of service delivery, systemization of service delivery, tangibles and social responsibility.

Bauer et al. (2005) supported the contention that it is favourable to withdraw from the idea of universal perception of perceived service quality. They confirmed the assumption of Gounaris and Dimitriadis (2003) to have varying dimensions across industries and proposed a specific measurement model for e-banking portals consisting of three categories; i.e. core services (basic service quality, security and trust), additional services (cross-buying service quality and added values) and problem solving services (transaction support and responsiveness). Based on content analysis of customer reviews of online banking services, Yang et al. (2004) identified six salient online service quality dimensions as reliability, responsiveness, competence, ease-of-use, product portfolio and security. In a systematic study of scale development for service quality exclusive for retail banking, Karatepe et al. (2005) established a four dimensional scale comprising of service environment, interaction quality, empathy and reliability. Gupta and Bansal (2012) developed an instrument to measure internet banking service quality with five dimensions; namely, security/privacy, reliability, efficiency, responsiveness, and site aesthetics. In a similar study, Kundu and Datta (2014) reviewed the past studies and presented a nine dimensional service quality construct for internet banking consisting of system availability, site aesthetics, ease of use, technical performance, reliability, privacy, trust, responsiveness and customisation.

The review of some of the influential past studies reveals that there are numerous scales developed to measure service quality for retail banking in the past and specifically on internet banking post 2000. A comprehensive list of dimensions has been incorporated in these studies. However, one striking observation is that there is no longer any focus on retail banking in the Indian context. Most researchers have shifted to electronic banking and missed the all-inclusive picture with multi-channel view including visit to banks, branch facilities, etc. There is a dearth of a comprehensive scale equally focusing on all aspects of banking i.e. retail, internet, ATM, etc. This study aims to fill this research gap by developing a scale to measure perceived quality in the context of Indian banking.

Research Objectives

The objectives of this study are:

To identify the various dimensions of perceived quality; and

To develop a comprehensive measurement scale for perceived quality in the context of the Indian banking industry.

Research Methodology

In order to develop a scale for perceived quality of banks, the first step adopted was a qualitative research which investigates the exhaustive list of factors determining quality with reference to Indian banks. Hence, a focus group discussion was undertaken with a set of bank customers and employees in order to find out the key components of perceived quality in the banking industry. After content analysis of the focus group outcomes consisting of systematic, thematic coding and interpretation, the list of important components of customers' perceived quality was derived. Table- 1 presents the frequency distribution of the key quality determinants from focus group discussion.

Table- 1 Focus Group results - Frequency distribution of themes identified

The second step was to develop the data collection instrument which was a structured questionnaire. A total of 34 items were constructed for the questionnaire using the focus group outcomes and were measured using a 5-point likert scale coded as strongly disagree, disagree, neither agree not disagree, agree and strongly agree. The items in the questionnaire were confirmed through content and face validity by marketing professors and banking experts. The next step was data collection using the questionnaire. The convenience sampling technique was used and the sample consisted of 150 respondents who were customers of various banks from Chennai City, Tamil Nadu. The exploratory factor analysis was performed with varimax rotation to determine the number of valid dimensions and to categorize the constructed items under these dimensions in order to develop a measurement scale for perceived quality.

Results

Table-2 presents the results of factor analysis with the list of components of perceived quality and its factor loadings. The findings show that the components can be grouped into eight distinct and appropriate dimensions as indicated in table- 2.

Table- 2 Components of Perceived Quality in Banking Industry

Each of the eight dimensions have been analyzed and discussed. The first dimension identified as customer care consists of statements such as providing speedy responses, clear answers to queries, dedicated customer care section, quick response and 24x7 support. Thus, the customer care dimension represents the quality of delivering professional and helpful assistance to the customers and addressing their questions and concerns diligently. This dimension accounts for 26.34 percent of variance in perceived quality. With additional novel items such as dedicated customer care section in banks and 24x7 care, this dimension is an improvised version of the traditional responsiveness dimension established by Parasuraman et al. (1985, 1988) which concerns the willingness to provide service and the timeliness of service. According to Johnston (1995) and Yang et al. (2004), superior customer care involves speedy and timely service delivery and prompt response to customer requests which provides satisfaction.

The second dimension detected in the analysis as ATM comprises of statements such as providing necessary services, maintenance, user-friendliness, number of withdrawals and cash withdrawal limit at ATM. Thus, the ATM dimension relates to the quality of functioning and services provided by the bank's ATMs which explains 15.95 percent of variance in perceived quality. Despite its importance especially in Indian banking system, there are very few studies in the past recognizing ATM as a significant and distinct dimension of quality. Al-Hawari et al. (2005) comprehended ATM as the most frequently used electronic distribution channel to perform main banking transactions such as deposit and withdrawal anytime and incorporated ATM service as a critical element to measure bank's automated service quality. According to Karatepe et al. (2005), quality of ATMs and computerized systems in terms of proper technology and efficient functioning is an essential component of a bank’s overall perceived quality.

The third dimension identified as electronic banking includes statements such as user friendly, attractive website, easy navigation, providing all necessary functions and mobile banking app service. Thus, the e-banking dimension refers to the functional and service quality offered by internet and mobile banking channels. This dimension accounts for 13.8 percent of variance in perceived quality of banks. According to Jun and Cai (2001), the increasing usage of internet and rising customer demands and expectations have necessitated greater focus on electronic banking quality. Al-Hawari et al. (2005) recognized internet banking as the widely used channel allowing consumers to use banking services anytime and anywhere. Hence, continuous improvement of its quality is crucial in terms of better ease of use, availability of up-to-date information, accurate transactions and website interface. In studies focusing exclusively on internet banking quality like Kundu and Datta (2014), each of these aspects are set as separate dimensions such as system availability, site aesthetics, ease of use and technical performance. This study has detected the important factors pertinent to Indian customers who focus mainly on the website functions and ease of use when it comes to e-banking.

The fourth dimension recognized as efficiency consists of statements such as fast transactions, speedy delivery, and no delay in service and no lengthy procedures/paper work. Thus, this dimension relates to the quality of banking services in terms of the speed, degree of red-tapism and time taken for transactions or service delivery which explains 10.17 percent of variance. Very few studies used efficiency as a distinct dimension like Joseph et al. (1999) where it refers to no wait time with statements such as connecting immediately, educating customers, provision of all options, etc. Others have incorporated some of these items into other dimensions such as reliability and responsiveness (Parasuraman et al., 1985; Jun and Cai, 2001) and effectiveness (Bahia and Nantel, 2000), but there is no special focus on the speed and efficiency of service delivery which has been identified in this study as a unique dimension of quality in the Indian banking context.

The fifth dimension identified as staff involves statements like addressing complaints in friendly manner, being courteous and helpful, well-qualified and knowledgeable and giving personal attention. Thus, this dimension deals with the level of competence and gracious behaviour of the bank staff which accounts for 8.48 percent of variance. This human element in service delivery is a decisive aspect of bank's quality stressed by many researchers in the past, especially in retail banking. Parasuraman et al. (1985), Johnston (1995), Oppewal and Vriens (2000) and Yang et al. (2004) believed that possession of skills, expertise and professionalism in service delivery and solving customer problems is a critical determinant of quality. Jun and Cai (2001) posited that the ability and knowledge to solve problems i.e. competence along with polite and friendly behaviour signifying courtesy are the pillars of customer service quality. Sureshchandar et al. (2002) conceptualized all aspects related to involvement of staff such as skills and ability, providing prompt and right service, courteousness, care and individual attention into one dimension of human element of service delivery. Karatepe et al. (2005) deemed that individualized attention to customers and willingness of bank personnel to help and solve problems of customers indicates empathy of the staff that reveals the quality of banks.

The sixth dimension detected in the study as security comprises of statements such as privacy of accounts and transactions, security while using e-banking, at branch and ATMs. Thus, this dimensions deals with the overall security of banking services and transactions carried out through all channels i.e. internet, ATM or bank visit. This dimension accounts for 8.08 percent of variance. This is a traditional dimension of quality highlighted by numerous studies in the past. According to Parasuraman et al. (1985), security indicates freedom from danger or risk which involves physical safety, financial safety and confidentiality. In case of online banking, Jun and Cai (2001) and Yang et al. (2004) highlighted privacy and safety of online transaction information and safeguarding personal information as an essential feature of quality. This study identified security as an all inclusive dimension related to privacy and safety across all channels of banking.

The seventh dimension recognized as tangibles includes statements such as good ambience, comfort facilities, spacious premises and crowding. Thus, this dimension refers to the tangible aspects or physical resources such as overall ambience, space and comfort facilities provided by the bank which accounts for 6.71 percent of variance in perceived quality. Karatepe et al. (2005) identified that the appearance, interior and exterior facilities of the bank is an important measure of service quality of banks and termed these as service environment. According to Parasuraman et al. (1985), tangibles refers to the physical evidence of service which includes physical facilities, tools and equipments used, appearance of personnel and other customers in service facility. However, the tangible dimension in this study incorporates only the physical facilities and ambience of the bank and not the human element.

The eighth dimension identified as core products and services consists of statements like providing wide range of products and services and variety of features. Thus, this dimension deals with the quality of core products and services provided by the bank which explains 5.52 percent of variance. Bahia and Nantel (2000) conceptualized this dimension as services portfolio describing it as the complete gamut of services and its consistency with the latest innovations in banking services. Jun and Cai (2001) perceived this aspect as one of the important considerations of customers in selecting their banks. Yang et al. (2004) believed that customers are more inclined to patronize banks which offer substantial variety of services as they are more likely to fulfil their diverse needs.

The measurement model showed an adequate data fit. The overall GFI statistics of the general model suggested that the proposed model was consistent with the data based on relative (GFI, IFI, CFI) and absolute (RMSEA) indices of fit: CMIN = 650.73, p < 0.000, c²/df = 1.304, GFI = 0.814, IFI = 0.985, CFI = 0.985, RMSEA = 0.045. The c²/df ratio was 1.304 which is within the prescribed range of 3 indicating an acceptable fit between the sample data and hypothetical model. The reliability analysis was carried out to test for internal consistency based on computation of cronbach alpha (reliability coefficient). The reliability for the eight factors found in the analysis as indicated in table- 3 was above the threshold of 0.7 and were considered reliable and adequate (Nunnally, 1978).

Table- 3 Reliability Analysis

Thus, this study attempts to explore the important elements of perceived quality of banking services based on qualitative research and then to statistically classify them into eight valid dimensions.

Conclusion

With the rising competition and customer expectations for superior service, quality has become a key differentiating factor in banking industry where there is minimal product differentiation. Hence, it is the need of the hour for the banks to understand customer’s perception of quality and deliver the same. The concept of overall quality of banks perceived by Indian customers is quite different from that of other countries. While overseas customers are rapidly heading towards a completely automated system, India, which is still dominated by retail banking and preference for personal visit to banks to utilize services, has still a long way to go. Hence, it is essential to evaluate perceived quality using a combination of dimensions considered significant in the Indian context. This study has managed to accomplish this objective of developing an indigenous measurement scale for perceived quality in banking sector. This consists of a balanced set of dimensions focusing on all key channels and aspects of banking. This empirical study could be significant to banks which provide an insight into the psyche of their customers for more accurate measurement of quality perceptions and for designing better strategies to improve their quality in future. However, it should be noted that this study was based in Chennai and hence limited to perceptions of banking customers in and around Chennai City, Tamil Nadu. For further research, this scale can be extended and validated by using a larger sample size covering different geographical locations of India.

Table- 4 Descriptive Statistics - Components of Perceived Quality

References

Al-Hawari, M., Hartley, N., & Ward, T. (2005). Measuring banks’ automated service quality: a confirmatory factor analysis approach. Marketing Bulletin, 16(1), 1-19.

Bahia, K., & Nantel, J. (2000). A reliable and valid measurement scale for the perceived service quality of banks. International Journal of Bank Marketing, 18(2), 84-91.

Bauer, H. H., Hammerschmidt, M., & Falk, T. (2005). Measuring the quality of e-banking portals. International Journal of Bank Marketing, 23(2), 153-175.

Bei, L. T., & Chiao, Y. C. (2001). An integrated model for the effects of perceived product, perceived service quality, and perceived price fairness on consumer satisfaction and loyalty. Journal of Consumer Satisfaction, Dissatisfaction and Complaining Behavior, 14, 125-140.

Cronin Jr, J. J., & Taylor, S. A. (1992). Measuring service quality: a reexamination and extension. Journal of Marketing, 56 (July), 55-68.

—————— (1994). SERVPERF versus SERVQUAL: reconciling performance-based and perceptions-minus-expectations measurement of service quality. Journal of Marketing, 58 (January), 125-131.

——————, Brady, M. K., & Hult, G. T. M. (2000). Assessing the effects of quality, value, and customer satisfaction on consumer behavioral intentions in service environments. Journal of Retailing, 76(2), 193-218.

Dabholkar, P. A., Shepherd, C. D., & Thorpe, D. I. (2000). A comprehensive framework for service quality: an investigation of critical conceptual and measurement issues through a longitudinal study. Journal of Retailing, 76(2), 139-173.

Dwivedi, A. K., & Charyulu, D. K. (2012). Efficiency of Indian banking industry in the post-reform era. International Journal of Business Continuity and Risk Management, 3(3), 234-243.

Eklöf, J. A., & Westlund, A. H. (2002). The pan-European customer satisfaction index programme—current work and the way ahead. Total Quality Management, 13(8), 1099-1106.

Fornell, C., Johnson, M. D., Anderson, E. W., Cha, J., & Bryant, B. E. (1996). The American customer satisfaction index: nature, purpose, and findings. Journal of Marketing, 60 (October), 7-18.

Gounaris, S. P., Stathakopoulos, V., & Athanassopoulos, A. D. (2003). Antecedents to perceived service quality: an exploratory study in the banking industry. International Journal of Bank Marketing, 21(4), 168-190.

—————— & Dimitriadis, S. (2003). Assessing service quality on the web: evidence from business-to-consumer portals. Journal of Services Marketing, 17(5), 529-548.

Grönroos, C. (1984). A service quality model and its marketing implications. European Journal of Marketing, 18(4), 36-44.

Gupta, K. K., & Bansal, I. (2012). Development of an instrument to measure internet banking service quality in India. Researchers World, 3(2), 11-25.

Holmlund, M., & Kock, S. (1996). Relationship marketing: the importance of customer-perceived service quality in retail banking. Service Industries Journal, 16(3), 287-304.

IBEF: Banking Sector in India. (2016). Retrieved August 14, 2016, from http://www.ibef.org/industry/banking-india.aspx

Johnson, M. D., Anderson, E. W., & Fornell, C. (1995). Rational and adaptive performance expectations in a customer satisfaction framework. Journal of Consumer Research, 21(4), 695-707.

Johnson, M. D., Gustafsson, A., Andreassen, T. W., Lervik, L., & Cha, J. (2001). The evolution and future of national customer satisfaction index models. Journal of Economic Psychology, 22(2), 217-245.

Johnston, R. (1995). The determinants of service quality: satisfiers and dissatisfiers. International Journal of Service Industry Management, 6(5), 53-71.

Joseph, M., McClure, C., & Joseph, B. (1999). Service quality in the banking sector: the impact of technology on service delivery. International Journal of Bank Marketing, 17(4), 182-193.

Jun, M., & Cai, S. (2001). The key determinants of internet banking service quality: a content analysis. International Journal of Bank Marketing, 19(7), 276-291.

Juran, J. M., & Godfrey, A. B. (1999). Quality handbook. United States: McGraw-Hill.

Kandampully, J., & Suhartanto, D. (2000). Customer loyalty in the hotel industry: the role of customer satisfaction and image. International Journal of Contemporary Hospitality Management, 12(6), 346-351.

Karatepe, O. M., Yavas, U., & Babakus, E. (2005). Measuring service quality of banks: scale development and validation. Journal of Retailing and Consumer Services, 12(5), 373-383.

Kundu, S., & Datta, S. K. (2014). A scale for measuring internet banking service quality: literature review and validation with Indian public sector banks. Journal of Electronic Commerce in Organizations (JECO), 12(3), 12-39.

Mangnale, V. S., & Chavan, J. (2012). Measuring customer satisfaction in Indian banking industry. Indian Streams Research Journal, 2(10), 1-8.

Mukerjee, K. (2013). Customer-oriented organizations: a framework for innovation. Journal of Business Strategy, 34(3), 49-56.

Nunnally, J. (1978). Psychometric methods. New York: McGraw-Hill.

Oppewal, H., & Vriens, M. (2000). Measuring perceived service quality using integrated conjoint experiments. International Journal of Bank Marketing, 18(4), 154-169.

Parasuraman, A., Zeithaml, V. A., & Berry, L. L. (1985). A conceptual model of service quality and its implications for future research. Journal of Marketing, 49 (Fall), 41-50.

—————— (1988). Servqual. Journal of Retailing, 64(1), 12-40.

—————— (1994). Alternative scales for measuring service quality: a comparative assessment based on psychometric and diagnostic criteria. Journal of Retailing, 70(3), 201-230.

—————— (1994). Reassessment of expectations as a comparison standard in measuring service quality: implications for further research. Journal of Marketing, 58(January), 111-124.

Rahmani-Nejad, L., Firoozbakht, Z., & Taghipoor, A. (2014). Service quality, relationship quality and customer loyalty (Case study: Banking industry in Iran). Open Journal of Social Sciences, 2(4), 262-267.

Sureshchandar, G. S., Rajendran, C., & Anantharaman, R. N. (2002). Determinants of customer-perceived service quality: a confirmatory factor analysis approach. Journal of Services Marketing, 16(1), 9-34.

Yang, Z., Jun, M., & Peterson, R. T. (2004). Measuring customer perceived online service quality: scale development and managerial implications. International Journal of Operations & Production Management, 24(11), 1149-1174.

Zeithaml, V. A. (1988). Consumer perceptions of price, quality, and value: a means-end model and synthesis of evidence. Journal of Marketing, 52(3), 2-22.